The mortgage pre-approval process

Many lenders have a different take on what the pre-approval process should include, or when they feel comfortable issuing a pre-approval letter. Some lenders are willing to just discuss your information over the phone and issue a pre-approval letter, which some may think is great since it's so easy, but there is quite a bit more to getting pre-approved then just having a verbal conversation about how things should look. Most mortgage applicants also don't know the difference between being "pre-qualified" and being "pre-approved". "Pre-qualified", this is an ambiguous term that is used to provide the homebuyer a false sense of security to engage in a mortgage transaction without the loan officer doing their proper due diligence. It's a cop-out for the explanation that should have been: "Based on the verbal information you sound good, however before you make an offer we need to verify everything we went over, that will include a credit check, reviewing income & asset documentation, and if needed, even verifying employment directly with your employer." In my opinion you should never be providing that initial paperwork after an offer is made, it should always be done prior to your offer.

The steps should actually go like:

1. Meet with a loan officer (this can be face to face or over the phone, I do not recommend solely done via email)2. Loan officer will explain the process to the homebuyer, what will be done at each milestone, when out of pocket costs should be expected3. Loan officer and homebuyer will verbally discuss the homebuyers situation, including financials, credit and any special circumstances the homebuyer is in (like getting gift funds, starting a new job in a new area, past employment, etc.)4. Homebuyer will complete a loan application (this is recommended to do with the loan officer "live", not just simply filling out the application and sending it to the loan officer) and credit is checked5. Homebuyer will provide loan officer documents the loan officer needs (paycheck stubs, W-2's, tax returns, bank statements, letters of explanation)6. Loan officer reviews documents and contacts employers for any further required verification (for example averaging overtime, commissions, etc. and clarifying start dates if employment has been less than 2 years), including running the loan through the automated underwriting system (be it FHA, VA or conventional). If the loan is "borderline" then the loan officer should contact underwriting to get clarification on how any unique aspects of the loan will be handled, and may even go so far as to send the entire loan file to underwriting to have a conditional underwriting approval issued for a "TBD" property address.7. Loan officer issues a pre-approval letter letting the homebuyer know they are pre-approved for a certain amount8. Homebuyer makes an offer and it's accepted9. Homebuyer or their real estate agent provides loan officer copy of contract terms10. Loan officer re-runs actual terms/conditions through automated underwriting again11. Loan officer/processing staff generates the loan application/disclosures for the homebuyer to sign/initial/date/return to the loan officer12. Loan is sent to underwriting (sometimes the title report needs to come in, sometimes the appraisal needs to come in - YMMV depending on the lender - the title report is ordered immediately, the appraisal can be ordered once you receive the application/disclosures)13. Underwriting reviews all documents and usually additional documents (called "conditions") are required, such as evidence of homeowners insurance, small items on the appraisal corrected (if needed), amongst a laundry list of possibilities (brace yourself for the underwriter to ask for small items so it doesn't come as a surprise, sometimes it isn't much at all, sometimes it can be a bit)14. Conditions are sent in to underwriter and reviewed, final loan approval is issued15. Loan officer informs homebuyer when documents can be prepared and delivered to title/escrow officer or closing attorney ("closing agent" is the generic term) for the closing (usually no more than 2 days from final approval)16. Closing agent prepares the final settlement statement (called a HUD-1) for lender approval, lender approves, homebuyer goes in to sign final loan documents in front of a notary17. Depending on the state you are buying in, it may fund/record the day you sign or there could be a few day period after you sign before it funds & records (rule of thumb is if you are east of the Rocky Mountains it's the same day, west of the Rocky Mountains usually there is a couple day delay - but vice versa can certainly be arranged ahead of time).

See how in the above process a majority of the processing/verifications were taken care of prior to the homebuyer going into escrow on the home, and not before? It cuts down on the "your paperwork didn't come over in the correct format and this is delaying your closing date" type of excuses. That is the way to properly handle a purchase transaction in my opinion.

If you want to know what steps your lender is taking to insure your pre-approval is solid, just ask, they shouldn't mind telling you, and it'll give you both a chance to feel more comfortable with the mortgage transaction process. Remember, this is like school, there are no stupid questions, and at no point in the process should your loan officer make you feel like you are wasting their time by asking questions.

Mortgages (FHA, VA, USDA, Fannie, Freddie, Non-Prime) since 2002, based in Irvine, CA and lending in all 50 states

Re: The mortgage pre-approval process

you mentioned on a couple of your responses that bank of america doesn't pay attention to details that could be an issue until after you are under contract. well my question is how far in the process could you still expect issues to come up? I am scheduled to close on the 2nd of august. received my conditional approval a while ago. the only thing thus far that has been requested other than the docs i have already submitted are things from the builder because the home is new construction (builder's permit, warranty of completion, soil treatment and termite forms, etc). We just submitted ther remaining docs today, so everything should be going for final approval. Could there still be an issue at this point? Are we pretty much good to go or do we still need to be on edge until we get the official ok to close? I havent given my notice to my apartment complex yet because I am so afraid that the deal will fall through in the end.

Re: The mortgage pre-approval process

The issues typically arise when the loan officer hasn't thoroughly thought through the (score for alliteration) entire loan, and after the underwriter reviews. Items could range from not requesting tax returns which contain a self-employed business loss the loan officer didn't ask of or the borrower accidentally didn't disclose and the loss throws debt ratios out of qualification range, a low-ball estimate on property taxes and/or insurance or not taking into consideration of an HOA fee the home has, not reviewing bank statements to make sure all significant deposits are sourced, and simply just not asking questions when they are unsure of something. A lot of loan officers are afraid to ask questions, and with some lenders it takes a very long time to get accurate answers. A family member of mine made it to supposedly a week before closing when the past employer overseas was unwilling to verify employment, so they only had 1 year 10 months in the US, and were declined. While that is a pretty unique situation, the loan officer, who had been working for this lender for 10+ years, should have just asked underwriting if the previous employer is unable to verify employment will we have an issue, and then had that verification taken care of immediately (or found out they won't verify).

Bank of America is one of bigger lenders that doesn't typically do a lot of pre-underwriting, I suppose it's because of how large of a volume of loans they do just doesn't allow a lot of it. Usually 2 or 3 people can be involved in the pre-underwriting process, and having that many people's hands on a loan that isn't under a contract to buy a home may be cost prohibitive. Not all lenders out there are like that, so it's always good to ask what the pre-approval process entails. Talk about your situation, ask the loan officer if they foresee any issues (even small ones), ask how your loan will be processed. With a good loan officer, which can exist at any lender, including Bank of America, a loan can be properly pre-underwritten... it just takes a little foresight, persistence and determination.

Mortgages (FHA, VA, USDA, Fannie, Freddie, Non-Prime) since 2002, based in Irvine, CA and lending in all 50 states

Re: The mortgage pre-approval process

Good afternoon Shane. Thank you for all your helpful insight. This has eluded me for a long time… Perhaps you can help me out with this. When shopping around for a mortgage, would asking the competing banks the following questions be appropriate? Because in the past, the banks looked at me like I was from Mars or something.

1) What’s your % rate for a person with my credit (I’ll have a full copy of at least 2 current credit reports), job verification, past 3 years tax return and financial statement. Proof will be handed to them in a nice 3 ring binder with colorful “idiot” tabs.

2) Total amount of money for ALL FEES, not associated with the principal and interest.

3) And finally, banks policy on early termination / payoff fee (if any)? -Note if there is any, I won’t bank there…-

Now I provide them with all the data, so that they can give me their best deal with the information I gave them. I refuse, I repeat- I refuse to let them run a credit check until I know they are in the ball park of where I want to be. Most seem to say they really need to do a full credit check to give me their best deal and without that credit check there is nothing to talk about. To the consumer that’s like “going steady” before we even have the 1st date. A discounted %rate is no good if I get over charged for mis. fees .

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Re: The mortgage pre-approval process

All 3 of those are excellent questions, and are entirely appropriate to ask a loan officer.

#1 usually requires a review of your situation, so it's good you'd be prepared with it.

#2 also requires figures to be known, such as sales price, down payment, where you are buying etc. Some of those numbers may not be known off the top of someone's head, so an estimate may be given instead.

#3 should be common policy that the loan officer should know. Most loans that are made these days do not have any sort of prepay penalty.

Mortgages (FHA, VA, USDA, Fannie, Freddie, Non-Prime) since 2002, based in Irvine, CA and lending in all 50 states

Re: The mortgage pre-approval process

I wanted to add this information as I feel it'll help people find the right loan officer, the loan officer who will make sure your loan has been properly pre-approved, and how you will probably know when you've found that person.

You'd want to start off interviewing a few loan officers which just means talking to them and asking as many questions as you can think of that you want to know about mortgage financing when buying a home - easy questions, difficult questions, scenario questions.

You'll want to ask what the pre-approval process entails and how long it takes. Will the underwriter who will be allowing your loan to close be the person reviewing your file as part of that process? Will it just be the loan officer reviewing your information? Will they even ask you for documentation?

You'll also want to ask what types of programs they offer, and once your documentation has been thoroughly examined you'd want to get what options would then apply to you, as well as ask what your loan officer thinks would be the best loan program for your situation.

You'll want to ask what type of fees & costs you could expect to incur along the way (credit report, earnest money deposit, home inspection, appraisal fee, closing costs, etc.), how much those costs are estimated to be, and when they are expected to be paid (at the time the service is performed, at closing, etc).

You'll also want to ask what type of loan terms can they offer you if you were to lock in your interest rate today. On the same day (preferably within minutes), ask all loan officers you are interviewing to send you their rates in writing for the same lock period (ex. 30 days) so you can see how many points (if any) or lender credit (if any) you will be getting for a range of interest rates (not just 4.500%, but ask for 4.000%, 4.125%, 4.250%, 4.375%, 4.500%, 4.625%, etc. so you can see how paying points affects your interest rate). You should also ask when your interest rate can be locked in (once an address is known, at submission to underwriting, once your loan is approved, etc).

You should also ask when & how they will be available - are you someone who likes to discuss things after the normal work hours on the phone? In person on a Saturday? Through email? If you like to have everything in writing to reference, but your loan officer can't put together explanations in writing to save their lives, then that may pose an issue. If you like to be able to drive to your loan officer's office quickly with an meat cleaver in hand looking for blood when things go wrong - then someone who lives far away will have a bigger head start than someone around the corner.

There are more variables to think of, some will be important to you and others will not, however I truly believe that you will have a feeling inside of you of pure comfort when you have found the loan officer who will be the perfect fit. You will leave the conversation having a full understanding of the road ahead and what is expected of you, as well as you'll feel the loan officer has left no stone unturned when going over your situation.

Mortgages (FHA, VA, USDA, Fannie, Freddie, Non-Prime) since 2002, based in Irvine, CA and lending in all 50 states

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